With more bills to pay, Jaitley may settle for token corporate tax cut

November, 25th 2015

Companies will have to wait a while for a significant tax rate reduction as all indications are of Finance Minister Arun Jaitley making only a token one per cent cut in fiscal 2016-17.

With payouts looming on account of the Seventh Pay Commission and One Rank One Pension, the muted disinvestment mop-up, and the government deciding not to cut public spending, the Finance Minister will have to make sure that the country’s finances do not get stressed.

“As part of the initial discussions with the industry on elimination of tax exemptions, the Finance Ministry had indicated that it could lower the corporate tax rate to 29 per cent next fiscal. This would also reflect its intent to actually bring down the tax incidence rather than just phase out exemptions,” said a person familiar with the development.

However, the Ministry is weighing the option of leaving the corporate tax rate unchanged or opt for a small cut in the next fiscal and assess the revenue implication of the withdrawal of the exemptions. A final decision is likely to be taken when the government moves closer making Budget 2016-17.

Retaining the corporate tax rate would also help create a buffer against the impact of the implementation of the Seventh Pay Commission reward that is estimated to cost at least ?1 lakh crore in 2016-17, the official added. Corporate tax collection amounted to ?1,82,635 crore in the first six months of this fiscal against the Budget target of ?4,70,628 crore as gross corporate tax receipts.

Jaitley had announced in this year’s Budget that the corporate tax rate would be reduced to 25 per cent from the prevailing 30 per cent over four years. Even if he makes a miniscule reduction, it would still be the first cut in over a decade. The last cut came in 2005-06 when the then Finance Minister, P Chidambaram, lowered the corporate tax rate to 30 per cent from 35 per cent.

“The improved indirect tax collections along with stable macro-economic parameters allow the Finance Minister to commence the promised lowering of the corporate rate from April 2016 itself possibly with a one percentage point cut in the rate to set the ball rolling. Deeper cuts could happen in 2017 and 2018 when the tax exemptions are eased out,” said Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP.